The Culture First Podcast - 04 - Stock Incentives; Career Development

Bronwen Clune, David Ostberg and Julie Rogers discuss Snapchat's backloaded stock option incentive, and discussion around the question "What are you willing to hurt for?" when it comes to career development.

The Culture First Podcast is released bi-weekly and explores what it means to be a culture first company. You can find out more about how to subscribe at CultureFirstPodcast.com

Transcript

Edited for grammar and syntax

Bronwen: Welcome to the Culture First Podcast. I'm Bronwen Clune, and I'm here with David Ostberg, our Director of Insights, and Julie Rogers, our Head of People. David, we've got some interesting things to discuss today. You want to give us a heads-up on an article you read?

David: Absolutely, so about a week ago, Snapchat started getting a lot of press about their back-loaded vesting schedule that they apparently recently released. What that means is, put some context into it, most companies that provide stock options to their employees, which is a really common thing in the tech sector of course. People typically have four years to vest their stock options and that's broken down by 25% per year. The first year typically doesn't vest until the very end of the year, so that's considered a first-year cliff. So, at the end of the first year an employee is now vested in 25% of their options. Over the course of the remaining three years, typically stock options vest at a pro-rated rate each month, so at the end of the second year, you would have 50% of your options vested, at the end of the third year, 75%, then of course, four years, you'd be at 100% vested.

Pretty common, there are some small variations on that, but Snapchat has moved forward with what's called back-loaded, or a back-loaded vesting schedule. Meaning, in their case, the first year, instead of 25%, employees get 10%. It's a cliff, so at the end of their first year they've only got 10% of their options vested. End of the second year is 20%, in addition to that 10%, so they're 30% in. Their third year they get an additional 30%, and then their fourth year they get the remaining 40%, so it's really pushing the majority of the vesting to the last two years, particularly the last year. You know, I was thinking about, what does that say to potential hires and to their employees in terms of how they value them, how people perceive their worth, and then, what does that mean for individuals who are looking for an experience that might be a bit shorter than four years?

Julie: It's a strange concept to me, because stock options are typically such a small portion of your overall compensation anyway, unless a company is actually public and it's got some sort of liquid value to their stock.

David: Or there's some crazy valuation to the options that creates a perception of great value, which could prove to be true or could just disappear.

Julie: It's interesting. In terms of incentives to stick around, this is not the 1950s where people go and they stay with their company for 30 years. It's really common for people to move every two or three years from one job to another and not be considered a job-hopper for that period of time. I'm actually curious what sort of affect this is going to have on getting people to stay, and are people going to be staying for the right reasons? If you get people to stick around and they're staying solely because there's a high valuation of business and they have options outstanding, are they sticking around in addition because they also have ability to grow within the business? Do they have career development opportunities? Are they working with people who they like to work with? I feel like those sorts of things are actually probably bigger drivers or bigger incentives to stay than having an option plan that drags out.

David: Absolutely, and, based on the hundreds of thousands of data points we have around what drives engagement within tech companies and other sectors, the compensation piece is typically quite low.

Bronwen: We often say that, but it's a little bit more of a nuanced explanation, isn't it?

David: Absolutely, we could consider it a hygiene factor. There has to be some minimum that's met so it's not a drain on the person's perception of their role in the organization. If they feel like they're under-valued from a compensation perspective, dramatically below market, then yes, that's going to have an impact I think on their commitment and their level of engagement.

Bronwen: Has their been any study, or does anyone know what stock options in particular, how that plays into being a driver? It's often flagged as a thing in recruitment, but what is the actual impact?

David: I don't know, actually. I mean, we don't separate that out in the way we measure compensation. Around the compensation question that we measure within our core engagement survey, we say, "Do you feel that your compensation is fair relative to market, and that includes your cash compensation, your benefits, and stock options?" We haven't broken those out. I don't know, that would be a great question for our data labs team.

Bronwen: I'm also wondering, Julie, I think you brought up something pretty interesting. If you're staying with a company just to vest your options, that's not a great motivation.

Julie: Possibly. I mean, if they've nailed these other components and they've got an incredibly motivating work environment where people are doing work that they love, they have an opportunity to grow, they're in an environment where they feel supported, they work with people who they like to work with, if they hit those factors in addition to other ones, then, perhaps staying for a longer period of time will just be the cherry on top. Getting the stock options vested will actually be a cherry on top instead of being a driver, but if all of those other components are absent, I don't think anyone's going to stay in order to actually have some sort of payout on the options. When it really comes down to it, unless there's a really good indicator that there's a liquidity event, options are really just options. They're funny money, as I like to call it.

David: The concern that I had initially was that this was just another version of the golden handcuffs, and it's around stock options. We know from our data that engagement typically drops most significantly between the second and fourth year, and it stays a bit low, up until around the sixth year. In tech, of course, that varies based on company, but, and then it starts to go back up. Granted, that's not saying that every company is going to follow that pattern.

As you mentioned, Julie, if these organizations have great opportunities for employees to learn and grow, to enhance their skills, they feel truly valued, they have work that they are really excited about and motivated by, then yes. They can stay really engaged. But, it's potentially a real risk to back-load the options for the company, because you may get people who really do feel like, "I can't leave because our valuation is so high," which Snapchat's certainly is currently. I believe it's at 16 billion. It'd be hard to walk away, say at post year two, just say "Okay, I'm a bit bored here" or "I'm frustrated" or "I don't see the progress we need" but the valuation is incredibly high so you just stay, and you try to slog through it. I think that's something that a lot of people will likely do, because, at a valuation that high, assuming that it stays at that level, you could be walking away from seven figures.

Julie: It's interesting, in the late 90s when the Bay area tech boom crashed, the company that I worked at, we actually had 0% voluntary attrition. People were not picking up and leaving their jobs because weren't other, no other jobs to go to.

It was very difficult. I was with this company for six years, then when things turned around, all of a sudden people just left, because they had the ability to leave. When things finally softened up and people could see that there were actually jobs out there, the kind of people who left were the ones who actually needed to leave. They were the ones who had probably needed to leave a couple years earlier, but they weren't able to.

Bronwen: So having those shorter options you're going to flush those people out quicker.

Julie: I mean, you want to. You want to be able to actually provide people the opportunity for mobility. Mobility is a really important part of growth, you get innovation, new ideas, added perspective in your business when you have people coming in. Unless you're a company that's growing massively and you're actually able to just bring in new people and new perspective across the board, what's going to happen is you need to have some other way to have a natural flow. Attrition's not a bad thing, on that front. It's important to have that sort of flow of new ideas into a company.

Bronwen: Yeah, and also the impact that's going to have on recruiting.

David: Absolutely. I've been reading some of the forums, or the boards of people in technology roles that have had offers from Snapchat and had chosen to decline them. There was concern around, "Hey, if I want to put in two years with a company and do my absolute best work and then move on to something entirely different, and I only will have," you know, maybe, at most, 30% of their options vested, they felt like that was devaluing before they even joined the company in terms of their worth as an employee.

Julie: That actually made me think of an additional component of this. I mean, I don't know anything else about Snapchat's approach to overall compensation. If they happen to provide, you know, if they're paying market rates, they're paying above market rate, somebody might be able to go in and say, "It's really important for me to go into a business and be able to actually do my best work and stay for two years, and yes, I'd be leaving money on the table, but for those two years I was getting paid above market rate for the work that I was doing." There might be some other gain that they might be able to take with them on that front.

David: My understanding is that they pay really well. The numbers that I've been reading about in terms of developers, compensation, cash compensation, is really high even compared to the Bay.

Julie: Oh wow, I always hear the opposite article. Opposite argument, that you have to pay higher because you are in the Bay.

David: There's one cliffhanger that I haven't mentioned. This is around the vesting, and how long you can hold onto a share, so after six and half years from the grant date of the options, if there hasn't been a liquidity event, your equity vanishes. There has to be a great deal of confidence by the leaders that there will be a liquidity event. Otherwise, you can stay there, you could work for four years, six years plus, and all of a sudden, if there hasn't been event, all those shares that you were holding disappear.

Julie: Wow. That kind of blows my mind, because you have to have an incredible level of trust in your leaders. Interesting. I read an article recently on a website called "The Future of Work" where they actually have some interesting articles around the workplace and how, practical skills, and how to get your team to work better together. This article in itself was around development of careers, and that's got a whole variety of different names, including things like career pathing, or career ladders. They talked about these five principles of career development, and I found them to be interesting. Some of them I agreed with, and some of them I would like to poke at.

An interesting component is, and something that Didier, our CEO, talks about quite a bit, is what you're willing to hurt for. Focusing on purpose, on the benefits and on balance, but not focusing on titles, and the concept around "Hey, what are we willing to hurt for in order to join with a company?" Compensation, are you willing to take a pay cut? Are you willing to actually go through and maybe work in a place that is not as exciting to you? What do you need to have in order to overcome those things? It's interesting, because there's an example in here and they talk about Google, and say, you know, "Google, everybody is here for the moral goal" but because they're motivated by the mission, security perks, compensation, and family benefits, that they're, that's a moral goal. I actually found some challenge with that because I don't find compensation or benefits or perks to be moral goals. I'm actually curious, would love to talk with you guys about what it's meant to you, and what you're willing to hurt for when Didier says you've got to decide as a business what you're willing to hurt for. What does that mean to you, in the concept of career development?

Bronwen: I think one of the reasons I love and have loved working here, some of that has kind of evolved over time. In the beginning, some of it was the opportunity to build a start-up that was still very early days, I was employee number 14, so there was the opportunity to grow massively with the company and have the experience of that. If I ever think "Wow, what else could I be doing?" the thing motivates me to stay here is about what we're actually trying to achieve. You realize what a challenge it is to be very true to that mission of building a company that is culture first. We still have trouble even defining what "Culture First" is, but I really enjoy the process of unpacking that. I think we're getting a lot of things right, but what makes me come to work every day is the people. The people we get to work with, and I think, you know, that's my motivation here more than anything else.

David: I have a very similar sentiment. I joined Culture Amp a little over seven months ago, and you know, had a few other opportunities in front of me. So when I think about, what am I willing to hurt for, to be a part of Culture Amp? I'm so in love with our mission and in love with our people, and what we do and how we do it, that it doesn't feel like I've had to really hurt for a lot. The one piece that was occasionally pops into my mind is the compensation component. There was another offer I had at the same time, when I had the Culture Amp offer that was about, 40-45% higher, and that's significant. But, I knew what that role would entail and what my personal life would look like, taking on that type of role. It was more of a consulting-oriented opportunity, and five years ago, that compensation difference would have been a really really challenging decision. It would have made things really tough. Now? I just know that the mission, and who I work with, what we do, is just so much more important to me and. Compensation here is competitive, it's good. You can always chase down bigger dollars in other places and it's just, the work-life component, that was just not appealing to me.

Bronwen: I also think there's a point at which companies can buy you. If you're paid massively well, there's an expectation. Not that I'd go, "Please don't pay me more" but I think there is also that element of trade-off. One of the things I was strong with Didier about before I took this job was my background as a journalist. I said, "That's part of who I am, and I don't ever want to be put in a situation where I feel that integrity is being challenged, and that I'm asked to do things that as a journalist I don't feel good about, or that I'm censored on topics that I feel passionately about."

Julie: You know, the things that I will bleed for are probably similar to you, David. I knew what I was getting into coming into a much smaller, earlier-stage start-up. I get to work with a team of people who I hold the utmost respect for, on a product that I feel has the actual ability to change the way that people work and the way that companies are run. There's nothing quite like data to support the work that I do, and also working in a space that I play in. I get to work with a bunch of people-geeks who understand, so I'm not fighting for a place at the table or for a voice. More than anything, I'm probably having to share what is normally, like, an HR-specific voice with the rest of the company because the rest of the company has lots of opinions about it.

Bronwen: Let's talk about that, because I actually think that's quite an interesting, kind of challenge.

Julie: I actually had a conversation about this recently with Didier, our CEO, and said "Hey, you know, we're running our annual engagement survey and I'm working on the questions," and he said, "I think we should put them out to everybody to look at in advance of actually running the engagement survey." I'm like, "You are out of your mind. Why would we do that?" but it makes sense because everybody here is so involved in the product. Everybody here cares very deeply about survey design, which, I have never worked at a place where anybody actually realized that there was a design of a survey, that it was intentional. Putting that out there gives people the opportunity to go through and weight in, and yes, I've had quite a few responses in my box this morning around people's input on the questions and the design itself. It allows people to go through and give their input on something that they care deeply about, and so it gives them a voice. Then, it also puts us in a place to, when the survey is run, they've actually given their input, and then they can answer the questions with their camper hat on.

David: It also opens the opportunity for some level of "Hey, I made some suggestions and they're not in here."

Julie: This is where we would trust people to make decisions. When you hire someone into a role, you've got to have someone who is going to be able to make those decisions, so, that's one of our values, is trusting people to make decisions. Ultimately, how the survey is designed is going to be a decision that I make along the way, but I do like to take in that feedback. It's finding that balance, and I think sometimes one of the hard things is moving quickly.

Bronwen: Collaboration is definitely becoming an increasing tension as we grow.

Julie: That's part of it too, and I think that's actually part of the transparent conversation. There are going to be points in time where decisions are going to be made and we're not going to be able to move everybody in because of that sort of, that speed. There is a degree of urgency where things need to be rolled out, and so not everyone needs to weigh in. It's going to be the people, the stakeholders who actually have a high stake in it, are going to be the ones who need to be looped in.